What GDP trends have we seen and what do we expect as we move into 2021?
The latest GDP data released by the Office for National Statistics (ONS) showed that the UK economy grew by a record-breaking 15.5% in the third quarter of this year. This officially ended the deepest recession in living memory. But, despite the record rate of growth in the last quarter, the economy is still some 10% smaller than it was at the start of 2020.
The details of the release revealed that the Eat Out to Help Out scheme positively impacted GDP in August but did little to create momentum for the hospitality sector going into September. In fact, the monthly GDP number for September of 1.1% was the weakest since the original lockdown was relaxed.
All the main sectors of the economy remain smaller than they were in January, with the manufacturing sector lagging behind both services and construction. Whilst retail sales are now comfortably above pre-Covid levels, a similar strength has not been reflected in overall household expenditure with consumption still 12.4% below where it was in 2019Q4.
What does it mean for our forecast?
All economic statistics are backward looking and although the latest GDP data is useful in informing our forecast, it has less weight than normal in our decision making due to the fast-moving nature of the economy. What matters most for our forecasts is the current circumstances we find ourselves in, namely lockdown 2.0.
The latest lockdown came into force on 5 November, forcing large parts of the UK economy such as accommodation and food services to close. However, with the manufacturing and construction sectors remaining open, the eventual impact on growth should be smaller than during the initial lockdown. The November lockdown is also expected to add to the total number of job losses, offset only partially by the extension of the furlough scheme out to the end of March. The unemployment rate is expected rise to around 8%, with the furlough scheme extension delaying the peak into the middle of next year.
Up until the announcement of the latest lockdown, we continued to expect a delayed-V shape recovery. However, we now expect a W-shaped recovery with GDP growth falling back below zero in the final three months of this year. There is also a greater risk of a double-dip recession as the economy continues to struggle with Covid-19 and the prospect of a No-deal Brexit.
The worst in not behind us
The latest data is reassuring but slightly disappointing with the economy losing more momentum then expected in September. It confirms that the economy is slowing and is likely to struggle for some time yet, as the national lockdown leads to another negative quarter at the end of this calendar year.
While recent news of an effective potential vaccine is a significant boost in the fight against Covid-19, the complexities of implementing a comprehensive vaccination programme mean we are unlikely to see the economic benefits until the second half of 2021. As such we continue to expect growth to be constrained at the start of next year, adding further pressure to an already stretched labour market.
It is crucial, now more than ever, to adopt a 360-degree view when it comes to monitoring the economy. While GDP is still a bellwether indicator, there are various data points which lenders should be paying attention to such as retail sales, house prices and credit trends. We will be providing regular updates across all these indicators in our bi-weekly updates so be sure to subscribe.
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